Life and Death Planning for Retirement Benefits

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Chapter 5: Roth Retirement Plans 239
that prevented an eligible individual who rolled money from a traditional nonIRA retirement plan
to a traditional IRA from immediately converting the traditional IRA to a Roth IRA.
Sandy Example: In 2010, Sandy, age 28, has compensation income of $300,000 and participates
in a 401(k) plan at her job. Because of her high income, she is not eligible to make a regular
contribution to a Roth IRA. So instead she makes a nondeductible regular contribution of $5,000
to a traditional IRA on June 1, 2010. Soon thereafter she converts the account to a Roth IRA. If
she has no other IRAs at any time during 2010, her conversion will be “tax-free,” because the
converted account contains nothing other than her own after-tax contribution. If she does have
other IRAs in 2010, the conversion will be taxed under the “cream-in-the-coffee” rule; see
B).
5.3.05 Penalty for excess Roth IRA contributions
There is an excise tax of six percent imposed on “regular” contributions to Roth IRAs in
excess of the applicable limits , just as there is for excess contributions to traditional
IRAs. Reg. A-7. See regarding the penalty on (and how to correct)
excess IRA contributions.
5.4 Conversion of Traditional Plan or IRA to a Roth IRA
The other main way to create a Roth IRA, besides making annual-type “regular”
contributions from compensation income is to transfer funds to a Roth IRA from a
traditional IRA or nonIRA plan. The amount so transferred is generally included in the
participant’s gross income as if it had been distributed to him This type of
contribution is called a “qualified rollover contribution” in the Code , a “ Roth
conversion” in this book.
Since there is no limit on the amount that can be converted from a traditional plan or IRA
to a Roth IRA, a conversion contribution can be a much more substantial amount than the few
thousand dollars per year maximum regular Roth IRA contribution .
This Chapter describes the Federal income tax treatment of Roth conversions. State income
tax treatment is not covered in this book.
See for how a Roth conversion interacts with the 10 percent penalty on early
distributions. See B) regarding the deadline for completing a Roth conversion.
Prior to September 27, 2010, a Roth IRA was the only possible destination for
“conversions.” See Reg. third sentence. Effective after that date, distributions
from traditional cash-or-deferred (CODA) plan accounts can be “converted” into a
DRAC (see , but (other than such “in-plan conversions”) funds from a traditional plan or
IRA can be rolled only into a Roth IRA and can NOT be rolled or converted to a DRAC.
5.4.01 What type of plan may be converted to a Roth IRA
This deals with Roth IRA conversions by the participant. Regarding the
ability or inability of a beneficiary to convert an inherited plan or IRA to a Roth IRA,
see (for the surviving spouse) or (for other beneficiaries).